Company Reports

Donaldson, a leading manufacturer of air and liquid filtration systems, has built a narrow moat around its large installed base of equipment coupled with a razor-and-blade business model that continues to generate a relatively steady and high-margin stream of recurring revenue from aftermarket parts and consumables. The firm generates an increasing portion of its sales from proprietary solutions, which enjoy higher margins and greater customer retention rates. As a result, recurring revenue has steadily increased, from roughly 50% in 2012 to over 60% in fiscal 2022. We expect this trend to continue, as the firm continues to scale their new life sciences segment both through organic investment and acquisitions.

Following years of anemic growth due to operational missteps and underinvestments, management has worked to right PepsiCo’s ship, even amid covid-19-related disruptions and input cost inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (such as energy drinks) and various emerging markets (such as Latin America, Africa, and Asia-Pacific), and an integrated business model facilitating more effective commercialization.

Bank of Montreal is the fourth-largest bank in Canada and one of six Canadian banks that collectively hold almost 90% of the nation's banking deposits. The bank derives roughly 60% of its revenue from Canada and 30% from the United States. BMO has a well-established Canadian banking presence, an established US retail operation in the Midwest, and growing commercial and capital markets capabilities. It is also the second-largest asset manager among the Canadian banks as well as the second-largest ETF provider in Canada.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and limited cyclicality representing just a handful of alluring structural features in an $144 billion US market (American Pet Products Association). While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Ferguson's exposure to the US RMI market (as a percentage of sales) increased from 31% in 2008 to 60% in 2023, while US new construction revenue exposure decreased from 58% to 40% over the same time period.

GE Vernova’s strategy is centered on developing products and services that enable electrification and decarbonization. The company's power segment largely consists of its gas power operations, which has the largest installed gas turbine fleet in the world.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

Pebblebrook Hotel Trust is the largest US lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in November 2018, the company owns 46 upper upscale hotels with more than 11,900 rooms, located primarily in urban gateway markets. Historically, Pebblebrook's combined portfolio has had a higher revenue per available room price point and EBITDA margin than its hotel REIT peers.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrancy. We view the company's strategy as relatively sound, and appreciate its efforts to restructure its looming 2025 debt to assuage bankruptcy concerns.

Park Hotels & Resorts is the second-largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in US light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

As the second-largest off-price retailer in the US with about 30% market share, we believe Ross Stores’ unique inventory procurement method and scale positions the firm to comfortably expand its top line at a mid-single-digit pace while fending off competition from online channels in future. We suggest that Ross’ standing as a reliable sales outlet for product manufacturers and traditional (or full-price) retailers looking to discreetly liquidate excess inventory should provide the firm with an abundant assortment of buying opportunities. Ross consistently stocks its more than 2,100 stores with a wide assortment of branded merchandise at bargain prices due to its plentiful vendor relationships and meticulous inventory management.

While already boasting a leading position in the domestic off-price retail industry via its T.J. Maxx and Marshalls banners, we believe TJX Companies is well positioned to continue leveraging its procurement scale and existing footprint to drive growth. The company’s go-to-market strategy is difficult to replicate, in our view, as its network of over 21,000 global vendors and decades of procurement expertise serve as barriers to entry. Unlike traditional retailers that obtain inventory via defined purchase orders and replenishment deals, TJX opportunistically procures excess inventory made available from manufacturing overruns and retail closeout sales at prices 20%-60% lower than conventional outlets. With an ever-changing assortment of brand-name merchandise and minimal depth per stock-keeping unit, the retailer’s stores embody a treasure-hunt shopping experience for consumers searching for bargains. As such, we view TJX’s brick-and-mortar model as well insulated from digital competition.

The London Stock Exchange Group, or LSEG, has doubled down on its market data and analytics strategy. After the Refinitiv acquisition, the new group is now vertically integrated from pretrading data and analytics over trading venues down to post-trade clearing and reporting, albeit dominated by its data business. Importantly, its assets form a strong symbiotic relationship wherein intellectual property generated within one strengthens the offering of the other, inducing demand for the group’s services.

Humm is restructuring where it is simplifying and improving products and systems, streamlining finance applications and narrowing its addressable market. From competing via a diversified product set, it now intends to focus on a select few product lines.

South Korea has traditionally displayed many of the factors we like in a telecommunications market. On the wireless side, there are only three national operators with their own networks, and they have behaved rationally, particularly over the past three to four years. On the fixed-line side, competition has been restrained, as there are no major cable operators. However, the regulator can be inconsistent and is too involved in decisions that we think should be left to the market, and the operators have on occasion behaved less rationally. KT is the incumbent fixed-line telecom operator in Korea. The firm is also the largest broadband provider and second-largest wireless telecommunications operator. It has a growing television business and is entering into other businesses, including cloud computing and payment processing.

For the better part of the past 15 years, Advance Auto Parts has grappled with bloated expenses and supply chain inefficiencies that continue to plague its cost structure and product availability. The company’s first two attempts at a strategic turnaround failed to materialize under past CEO Darren Jackson (2008-2015) and Tom Greco (2016-2023), and the firm has recently called upon Shane O’Kelly to lead another turnaround.

OGE Energy completed its long transition to a fully regulated all-electric utility in late 2022 when it finished divesting its midstream gas business.

We award a narrow economic moat rating to Boston Beer based on brand awareness and close distributor relations built over the decades, thanks to the firm’s commercial success in various on-trend categories including hard seltzer, hard cider, and flavored malt beverages, which make up 85% of total volume.

Estimating 3M's legal liabilities is a highly uncertain exercise. While some believe these liabilities total greater than the firm's market capitalization, we think 3M's settlements and the spinoff of Solventum greatly reduce 3M's risks and is the right move for shareholders. While we remain concerned over 3M's incremental PFAS-related liabilities, we think they're manageable.